Aug 30, 2019

Fuel Efficiency Chaos Highlights Importance of Checks and Balances

James Broughel Senior Research Fellow

It’s been one crazy summer for fuel efficiency. As the Trump administration has moved to finalize its new fuel economy standards—rules that roll back those set by the Obama administration—several key automakers have responded by cutting a deal with the state of California to reduce emissions beyond what the new federal regulations would require.

This maneuver could effectively circumvent whatever new rules come from Washington, setting the stage for an epic battle between the White House and California. More importantly, the episode demonstrates how the checks and balances built into our regulatory system are quietly eroding at every turn.

Over the last seventy years or so, two major checks have been added to the federal regulatory system to protect Americans from overzealous regulators. The first was the Administrative Procedure Act (APA) of 1946. This created a formal process by which regulations are proposed, feedback is gathered from the public, and regulators respond to public concerns before rules are finalized.

The second check came in 1981, when President Reagan issued an executive order requiring cost-benefit analysis for some of the largest federal regulations. That order also created a quality control process for rules, overseen by the Office of Information and Regulatory Affairs (OIRA).

Whereas the APA was supposed to guarantee public participation in rulemaking, Reagan’s order was intended to make rules evidence-based and efficient. Neither process works very well. In fact, agencies routinely flout public comments, and the analyses agencies produce are often incoherent.

But these are the checks and balances that exist, and they are better than nothing. At least they inject some degree of rationality and accountability into a process that would otherwise allow agencies to run roughshod over the American people.

As limited as those checks are, they are often evaded by regulators. A prime example came in 2009, when the Obama administration authorized a special federal waiver to California under the Clear Air Act. Usually federal emission standards for motor vehicles preempt state law, but this waiver allowed California to set its own greenhouse gas emission standards stricter than federal standards. Other states could sign on to the California standards if they so chose.

The decision to approve the waiver had massive implications, in ways both positive and negative. Strict fuel efficiency standards make cars more expensive to purchase on the one hand, but also driving becomes relatively cheaper as cars get better gas mileage.

Furthermore, these standards create public health tradeoffs. They limit emissions, which can save lives. But they also result in smaller, more dangerous cars on the road, and incentivize Americans to drive more miles, which can lead to more deaths.

With so much blood and treasure on the line, one would hope the Obama administration would have proceeded with extreme caution before approving such an important waiver. But there was no comprehensive cost-benefit analysis performed to determine whether on balance this policy decision would do more good than harm. California performed a rudimentary analysis, but there was no national cost-benefit analysis, and a former OIRA administrator has suggested that had there been such an analysis for OIRA to review, it would have likely failed a cost-benefit test.

The Obama administration’s decision to put politics before prudence is now having major ramifications, and the results aren’t pretty. Thirteen states have signed on to California’s stricter standards. The Trump administration is threatening to revoke California’s waiver in response, and auto companies are being left in the lurch.

Wanting regulatory certainly, and out of fear of the US car market being split in two, several companies decided that a deal with California was their best option. But what is good for the auto industry is not necessarily good for the country. If the agreement is allowed to stand, many more companies will likely sign on, and this could effectively make California the new fuel economy regulator for the United States, neutering the federal government.

This would be a crazy result, not just because this is a federal responsibility, but because of California’s poor regulatory track record. California is already the most regulated state in the union in terms of state regulation. Its building standards code alone has more regulations than some states’ entire rulebooks. This is contributing to a housing crisis and homelessness in the Golden State. California is a bastion of regulatory dysfunction; letting it dictate fuel efficiency for the entire nation could spread that dysfunction to all states.

One might argue: this is a voluntary agreement, why not let automakers do as they please? But this overlooks that what appears voluntary on the surface may be undergirded by threats and coercion. Governments often impose mandates through nebulous “regulatory dark matter”: rules that are not formally law, but that business and consumers feel obligated to comply with, for fear of government reprisal.

For example, government agencies routinely write informal “guidance” to industry, explaining how businesses can avoid fees and penalties with certainty. Businesses don’t have to comply, legally, but many feel they have no choice. It’s a voluntary action in name only.

Government agencies exert subtle and not-so-subtle influence over businesses in countless ways. A powerful regulator might give a speech and chastise a business practice he doesn’t like. Even a tweet can have widespread ramifications. A lawyer might look at these activities and shrug, concluding these things don’t have the force of law. But all of these activities have consequences; they result in behavioral changes that have costs and benefits associated with them.

Over time, our elected representatives have delegated away much of their power to unelected regulators. Now, more and more of the regulatory apparatus is moving outside the regulatory process altogether into the realm of informal threats and regulatory dark matter. The “voluntary” agreement reached between California and automakers is just the latest example of this undermining of the rule of law—one that could have far-reaching, lasting implications.

The checks and balances in our system—as imperfect as they are—were put there for a reason. The saga unfolding between California and the Trump administration highlights the chaos that follows when checks and balances go ignored. Only time will tell how this all plays out, but bet on one thing: those who sow the chaos will not be the same as those left holding the bag—or in this case, the steering wheel.

Photo by Justin Sullivan/Getty Images

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